One important step in the homebuying journey that you might not be fully aware of is pre-approval. Let's break down what it is and why it's crucial, especially at this moment.

What Is Pre-Approval?

Pre-approval is basically your lender giving you the thumbs up. It shows you how much money they’re ready to lend you for buying a home. To figure that out, the lender reviews your financial history. According to Realtor.com, here are some documents you might need to provide during this process:

• Your W-2s from the past two years

• Tax returns from the last couple of years

• Pay stubs from the past month

• Bank statements from the last two months

• Statements for any investment accounts, if you have them

• A two-year history of your previous addresses

You'll receive a pre-approval letter that indicates how much you can borrow. Just remember, any changes in your financial situation can impact your pre-approval. So, once you have that letter, try not to switch jobs, apply for new credit cards or loans, or withdraw large amounts from your savings.

How It Helps You Determine Your Borrowing Power

This year, home prices are likely to go up in many areas, and mortgage rates are still a bit unpredictable. Since affordability is still a challenge, it’s smart to have a chat with a lender about your home loan options. They can help you understand how the current shifts in mortgage rates might affect your monthly payments down the line.

The pre-approval process is an ideal opportunity for you to assess your finances. It helps you understand the maximum amount you can borrow, which is essential for setting your budget. With this knowledge, you can focus your home search on properties that fit comfortably within your monthly mortgage payment range. This approach ensures you won’t get attached to a home that exceeds your financial comfort level.

How It Helps You Stand Out

When you decide on a home to make an offer on, getting pre-approved offers another significant advantage. It not only boosts the strength of your offer but also demonstrates to sellers that you’ve already completed a credit and financial assessment.

When a seller views you as a serious buyer, they're often more drawn to your offer since it appears more likely to be completed. As Greg McBride, Chief Financial Analyst at Bankrate, points out:

““Preapproval carries more weight because it means lenders have actually done more than a cursory review of your credit and your finances, but have instead reviewed your pay stubs, tax returns and bank statements. A preapproval means you’ve cleared the hurdles necessary to be approved for a mortgage up to a certain dollar amount.”
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— Greg McBride, Chief Financial Analyst at Bankrate

Bottom Line

If you're thinking about buying a home, getting pre-approved for a mortgage should be at the top of your list. It’ll help you know how much you can borrow and put you in a great spot to make a strong offer when you find a home you really like. Reach out to a reliable lender to find out more.